The Art of Cost-effective Compromise

Alternative dispute resolution can ease the headaches and lower the costs of heading to court

Old adages get that way because they are timeless, usually expressing something fundamental about the human condition. Two in particular are apt for this column: To err is human, and Two wrongs don't make a right.

To err is human expresses the legal philosophy behind the negligence standard; i.e., under tort law, the standard by which professionals are judged negligent or not negligent. The standard is not perfection. In fact, professionals, being human and therefore imperfect, are permitted to make errors, provided that in doing so they exercise reasonable prudence; i.e., they do what any reasonable professional ordinarily would under similar circumstances. In short, the law recognizes that: To err is human.

So, what happens when you discover that your engineering firm has erred in the design of your new plant or that a contractor did the same during construction? Here's where Two wrongs don't make a right comes into play, because first calling on an attorney to effect a right would be wrong number two, unless no other reasonable alternative existed. Such an alternative does exist -- alternative dispute resolution (ADR).

Binding Arbitration
The oldest, best-known form of ADR is binding arbitration, brought to the construction industry in the mid-1870s. Of all the various types of ADR out there, this is my least favorite, because it's adversarial, just as litigation is. Using attorneys, each side attempts to bash the other side's brains out in front of a neutral party, in this case, an arbitrator. Discovery may or may not be permitted, meaning that documents vital to a full understanding of the issues may not be brought to light, and the arbitrator's decisions are seldom appealable -- even if they're bad.

Accommodative ADR
Just about all other forms of ADR could be termed accommodative dispute resolution because they rely on the notion that both sides want to settle the dispute as quickly and reasonably as possible, and thus would rather accommodate one another than go for their respective jugulars. These newer forms of ADR first began to appear in the mid-1970s; about a century after binding arbitration was established. The very first was dubbed mediation/arbitration, or med/arb. It was the brainchild of John P. Gnaedinger, PE, the founder of Soil Testing Services, Inc. and a founder and president of what is now ASFE/The Best People on Earth.

Med/Arb
Used in other industries, med/arb relied on one neutral to serve both as mediator of a dispute and, if a settlement could not be achieved, to then serve as arbitrator. The notion was that parties would be far more willing to achieve a settlement of their own design via mediation knowing that the mediator would have the authority to impose a settlement if the disputants could not achieve agreement.

Med/arb was controversial. Detractors said it was not a good approach because the mediator would gain information about the least amount of money one side would accept and the most that the other side would pay. As a result, they contended, were the neutral required to arbitrate, the individual would be predisposed to impose a settlement that split the difference; e.g., to rule that $100,000 was the correct number given that, during meditation, the most the defendant said it would be willing to pay was $75,000 and the least the complainant said it would be willing to accept was $125,000. In mediation, "splitting the baby" is acceptable, detractors (mostly lawyers) said, but it was not appropriate for arbitration.

As it so happens, med/arb's single-neutral "problem" was recognized while med/arb was being created, and for that reason the approach called for reliance on a neutral who was pre-selected by the two parties to the contract, itself a unique new approach. But that was not enough to solve the problem, and med/arb was not extensively used. Its creation was still a seminal event, however, because it "got the ball rolling" and spurred a tremendous amount of dialogue, debate, and discussion, all of which rapidly led to the creation of a number of new approaches.

Med/Arb2
Med/Arb2 is one of the new approaches. Developed by ASFE, it calls for disputants to spend 60 days (more or less) in an effort to settle the dispute between themselves. If they are unable to settle all (or any) issues, they would commence mediation using a mediator they selected beforehand. Should mediation not result in resolution, the dispute would go to arbitration, with a different person serving as the arbitrator. However, were most of the issues settled via meditation, the parties and the mediator could agree to have the mediator arbitrate the outstanding issues.

Mediation
Today, mediation seems to be the most popular form of ADR after arbitration. Some people object to it on the grounds that it's like "splitting the baby," and that's not an unfair characterization. The mediator works privately with one side to identify the least it will accept, often cajoling that side into a lower amount using a variety of arguments; e.g., "If you have to go into court, your position will be blown full of holes," or "Think about how much it's going to cost you to win your case, in terms of legal expenses, time, and frustration. Wouldn't you be better off settling now for less, given the legal expenses and time you'll save?" When the neutral goes into the other side's room, the comments are much the same, except that "less" becomes "more."

When mediation is successful, it's not uncommon for both sides to feel as though they've lost: "We paid too much," one side says. "We got too little," the other side whines. But both have won, for the four reasons cited below (most of which apply to all forms of accommodative dispute resolution):

First: Mediation can save relationships. That's seldom the case when litigation or binding arbitration is used to resolve disputes because the adversarial nature of the processes destroys relationships. In fact, when one side feels it paid too much and the other side believes it got too little, both sides have accommodated the other -- and that's a good thing.

Second: Damages can be recompensed using non-cash methods, in whole or in part. For example, a design firm may compensate an owner for a $100,000 problem by offering to extend a $60,000 fee credit on each of the next two assignments. In that way, the client would get a real bargain (credit worth 20 percent more than what it lost) and so would the designer (which would pay out less than $100,000 and secure its next two projects from what would remain a good client).

Third: The amount of money saved by not having to go through the various legal maneuverings, including discovery, can be huge. But why is avoiding discovery a good thing with mediation, but a bad thing when arbitration is the ADR method used? Because arbitration is adversarial and mediation is accommodative, so, given the latter approach, both parties more or less agree that dispute resolution is more about the money and less about right and wrong, so it behooves them both to spend as little as possible on the process. (Do note, however, that you still need a lawyer to give you good, unbiased advice on which type of ADR may be best, how to proceed using that form of ADR, what the costs of other types of dispute resolution might be, and so on.)

Fourth: Mediation is not just inexpensive -- it's fast. Instead of resolution taking a year or two, or possibly more, it can be over within 30 days.

Resolution by Experts
An ADR procedure my engineer friend likes (I do too) is called resolution by experts. It works like this:

When a dispute occurs, and assuming it embroils only two parties, each retains an expert, and the two experts retain a third who acts as chair. The three review the various facts of the case, including those derived from limited discovery of documents, and they achieve a consensus (or unanimity) on the technical issues; i.e., what happened and why. Then they assign blame and use a party's share of culpability as its share of the damages. The three-expert panel determines what the damages really are based on the real cost of repair, rather than the sometimes absurd sums claimed in adversarial procedures.

To help limit gamesmanship, a party would have to pay a penalty were it to reject the experts' recommendation and rely on litigation to achieve a result that was not 20 percent (more or less) more favorable. And toward that end, the experts' findings could be used in court and they would be permitted to testify.

As with most other forms of ADR, the resolution by experts approach can be customized as the contracted parties deem fit; e.g., they could eliminate the penalty if litigation is used or could adjust the amount of the penalty; they could select two neutrals beforehand rather than wait for a dispute to arise; etc. In almost all cases, however, it is worthwhile to specify in the parties' contract the type of dispute resolution method and its particular elements. Waiting for a dispute to arise to specify the dispute resolution method is unwise.

Dispute Review Boards
Dispute review boards (DRBs) compose yet another form of accommodative ADR, and are in many respects similar to resolution by experts. The approach was developed for use on major projects, like tunnels, but any number of smaller (but still significant projects) would benefit from relying on it. In essence, a three-expert group is selected prior to construction, to hear and make recommendations about claims made by the designers, contractors, or owner. The contractors' bid documents are sequestered to help ensure claims for extras and changes are legitimate.

Experience shows that contractors' bids are substantially less when DRBs are used because they know they can consider fewer contingencies. That being the case, only better contractors are typically interested in the project because they will not be able to profit from manipulation and gamesmanship. Experience also shows that DRBs result in fewer claims because those who have issues are motivated to settle them among themselves, rather than show their "dirty linen" to the highly respected, eminent professionals who, typically, comprise the DRB.

Alternatives to Alternatives
A number of additional ADR methods are available, including different types of binding and non-binding arbitration, mini-trials, and the like.

Bottom line: Despite one's best efforts, disputes will arise. The goal should be to keep the cost of resolving the dispute low for all parities, and to keep the cost of damages fair. When both sides begin a project by indicating they want to achieve reasonableness in the event of a dispute, they are far more likely to also want to discuss additional methods for avoiding disputes to begin with. Which gets me to another old adage, namely: An ounce of prevention is worth a pound of cure. That's a concept we can look at next time.

ADR: A Legal Overview
Compiled from information available at the Legal Information Institute: www.law.cornell.edu. Alternative Dispute Resolution (ADR) is meant to indicate any means of settling legal disputes outside the courtroom. The most common methods of ADR are: mediation, arbitration, conciliation, and early neutral evaluation. The most common of these are mediation and arbitration. Arbitration is like a trial without discovery and with simplified rules of evidence. Both sides must agree on an arbitrator, or each side selects its own arbitrator who then select a third to compose an arbitrator panel. Hearings usually last only a few hours, and the opinions are not considered public records. Arbitration has been used most often to settle construction, labor, and securities regulation disputes.

Title 9 of the U.S. Code established federal law in support of arbitration, and federal law supersedes state law concerning arbitration. The Uniform Arbitration Act has been adopted by 35 states, so the decision of an arbitrator may be enforceable under state and federal law. Mediation is even less formal than arbitration. Mediators attempt to negotiate with both sides to arrive at an agreement that both either accept or reject.

This article originally appeared in the 11/01/2005 issue of Environmental Protection.

comments powered by Disqus